Arlington County Civic Federation

The Civic Voice of Arlington

Report on Revenues and Expenditures

Submitted April 5, 2005

1. The Arlington County Civic Federation recommends to the Arlington County Board that it adopt a Fiscal Year 2006 General Fund Budget that is balanced at $764.8 Million [an increase of $46.3 million – 6.4% over the FY’05 Adopted Budget]. This would be accomplished by:

· Beginning with the County Manager’s original revenue and expenditure estimates, but adding his Strategic Options, including Pay-As-You-Go capital and affordable housing, and his capital reserve to the Base Budget;

· Recommending a modest net increase in expenditures and contingents;

· Re-estimating net additional FY’05 revenues of $23.5 Million;

· Re-estimating FY’06 revenues (an increase of $25.2 Million);

· Estimating additional FY’06 miscellaneous fee and other non-tax increases (an increase

of $3.3 Million).

The real estate property tax rate, within the advertised rate, would be reduced by 11.4 cents to 84.4 cents per $100 of assessed value. With the recommended rate, the average single-family homeowner’s tax bill would still increase by about $326 – 9.2% (rather than the about $849 –24% originally proposed).

2. Whereas there is concern that even the reduced magnitude of increase recommended above, well above inflation (the Jan’05 to Jan’06 CPI increase was 3.6%) and population growth, has continued for a number of years and is not sustainable for the County’s taxpayers. This concern should influence future budget decisions and presentations. In September 2004, the County Manager agreed and stated: “…they have resulted in General Fund expenditures growing by an average of 7.4% a year. This level of growth is not sustainable for the long-term.”

Whereas there is continued concern that in recent years the County Manager’s proposed budgets have systematically underestimated both rising property assessments and expenditures. This has resulted in revenue collections in each fiscal year well above the budgeted amounts and smaller downward adjustments to property tax rates than would be justified by more accurate projections of the tax rates required to finance the proposed budgets. Citizens should not have to dread rising assessments because they result in substantial increases in taxes. Further, the presented budgets have failed to show the extent of actual spending increases. The low revenue estimates have allowed the county to spend roughly $ 25, $45, $56, and $33 million more than the County Manager’s proposed budgets in the previous 4 fiscal years without subjecting the additional spending to the rigors of the normal budget review process.

Assessment Projection Accuracy: Percentage Changes from Prior Year

Calendar Year	2002	2003	2004
Co. Manager estimate	4.0%	4.0%	6.0%
CivFed Estimate	8.0%	9.0%	16.3%
Actual	11.5%	18.1%	18.3%

Expenditure Accuracy (millions of dollars per year)

Fiscal Year	2001	2002	2003	2004	2005
CM Proposed	639.8	685.7	737.9	800.9	859.2
Adopted	659.5	710.4	754.5	805.3	870.6
Actual	664.9	730.6	793.9	834.4	---
Actual vs CM	25.1	44.9	56.0	33.5

Whereas the Committee is concerned that the Manager’s Proposed Budget contains very limited information on trends in employee compensation, the largest functional category in the budget, including important fringe benefits such the employer’s contribution to pension plan and healthcare plans. The few pie charts on compensation provide little basis for systematic long-term review.

Therefore, the Federation recommends to the Arlington County Board a number of procedural improvements in budget presentation and in program operation. The Federation also expresses its thanks to the Board and staff for adoption of a number of past Federation recommendations, such as summary presentations for program areas crossing departmental boundaries.

3. The Federation recommends to the Arlington County Board that: 1) it direct the County Manager to issue the Mid-Year Review and recommendations on the use of proposed budget contingents as early as possible in the public review process of future budgets, and 2) it direct the County Manager, through the budget guidelines for FY’07, to prepare a base budget proposal which provides a continuing level of services regardless of real estate assessments as well as readopt, beginning in FY’07, the Greenrod procedure whereby budget proposals would periodically identify for specific public scrutiny, agency by agency, programs where recent levels of staffing and funding may no longer be required to provide reasonable levels of service.

6. The President of the Federation is authorized to transmit approved motions and supporting information, including macro-economic calculations and comparisons, to the County Board, the School Board, the media, and other interested parties and to offer to make Federation Committee members available to explain the motions, recommendations for procedural improvements, and supporting text.

Table of Contents Page:

Overview...............................…..………….2

Summary of Recommendations.............…..4

Explanation of Recommendations........…...5

Procedural Improvements..................……14

Report of the Schools Committee……..…15

OVERVIEW

On February 15, 2005, the County Manager presented the County Board with a proposed FY 2006 budget. It followed earlier County Board guidance.

Proposed revenues at current rates of $783.9 Million (+9.1%)

[includes $1.3 million prior fund balances]

Proposed expenditures $745.0 Million (+3.7%)

[includes a compensation contingent of $10.9 million,

but eliminates Pay-As-You-Go Capital]

Leaving an FY’06 Budget Contingent and Reserve for Tax

Relief/Affordable Housing/Reserve Fund of $ 38.9 Million

Overall expenditures for basic County services were presented as receiving a 1.5% increase (more accurately 5.3% with the addition of the expected capital outlays or 5.6% if the budget contingent were also added). On March 15, 2005, the County Board voted to advertise the real estate rate at the reduced rate of 90.8 cents per $100 of assessed valuation. At this reduced rate, using the Manager’s unrealistic estimate of a 6% rise in assessments, the tax bill of the average single family home would have increased by 17.5% -- an average of about $620.

The Manager identified five CRITICAL DECISION AREAS: Tax Relief and Reserve Fund, Increased Support for Affordable Housing, Sustaining Base Operating Budget, Strategic Options, and Providing for Long-Term Economic Sustainability.

Major Factors:

Expenditures:

· METRO operations were projected to increase by 10.2%.

· Pay-As-You-Go capital outlays were omitted.

· County Debt Service was projected to increase by 17.4% mostly to cover the voter

approved 2004 bond issues.

Revenues: Based upon very pessimistic assumptions, the Manager projected increases as follows:

· Because of increased assessments and new construction, real estate tax collections would increase by 18.1%. Personal property tax collections would fall by 8.1%. Overall, local taxes were projected to increase by 12.5%. Revenues from the Commonwealth were to increase by 6.2% and those from the Federal Government to decrease by 2.2%.

· Water and sewer fees were scheduled to increase by 15 percent.

· Tax and fees options for $3.5 million were presented

Distributable Contingents:

· $10.9 million was set aside for a Compensation Contingent to cover COLA and other items, such as retirement system solvency, to be explained by the manager at a later date.

· $1.4 million was available for Strategic Options.

COMMITTEE REVIEW PROCESS:

The Revenues and Expenditures Committee again agreed at the start of its examination of the budget that our review would be conducted on the following terms:

o Base budget programs would be examined for excesses (including duplication) or under-funding;

o Normal inflation allowances (including step increases) would be expected;

o Changes in Commonwealth or Federal funds would be adjusted with local funding where necessary;

o The Schools funding level would follow the newly revised Revenue Sharing Agreement between the County Manager and the School Superintendent;

o Some modest increases would be considered for priority new initiatives, particularly in public safety. The Committee included all changes, either increase or reductions, required to be consistent with Federation approved motions;

o Some early decisions were to be made tentatively; subject to review after County staff responses to Committee questions were received and reviewed. Compared to FY’05, many more responses were received;

o A realistic estimate of carryover funds from FY’05 would be developed without reference to the County Manager’s unwillingness to incorporate an estimate in his budget; and

o The Committee would then recommend a real estate tax rate and/or other rate changes that would balance the resulting budget. This is our standard procedure whatever the changes in assessments have been over the past year, with the focus always on taxing the exact amount required to fund County operations, regardless of changes in real estate assessments.

o In its deliberations, the Committee decided to follow Federation member recommendations after the discussion of our last Legislative Package and facilitate separate Federation member votes on areas where the Committee had very split views on recommendations.

Using these procedures and goal, the Revenues and Expenditures Committee makes the following recommendations:

SUMMARY OF RECOMMENDATIONS

(in millions of dollars with rounding)

REVENUES:

A. County Manager’s BASE BUDGET…………………………………………$783.9

B. FY’05 Carryover…………………………………………………….………...+23.5

C. FY’05 Capital Reserve………………………………………………………….+2.8

D. FY’06 Revenue Re-estimations………………………………………..……...+25.2

E. Manager’s change to Real Estate Tax Relief…………………………………...- 0.2

F. FY’06 Net Fee Changes………………………………………………………..+ 3.3

TOTAL..………$838.5

EXPENDITURES:

1. County Manager’s BASE BUDGET

(including compensation contingent)………………….………………………..$745.0

2. Transfer to the Schools………………………………………...………………….+1.7

3. General Government………………………………………………………………+0.1

4. Courts and Constitutional Officers………………………………………………..+0.4

5. Public Safety………………………………………………………………………+1.0

6. Environmental Services……………………………………………….………….+.0.4

7. Human Services…………………………………………………………………...+1.0

8. Libraries………………………………….……..…………………………………..0.0

9. Economic Development…………………...………………………………………..0.0

10. Community Planning, Housing & Development………………………………….. 0.0

11. Parks, Recreation, & Community Resources……………………………………...+0.3

12. Non-Departmental & Debt Service………………………………………………..+1.5

13. Regionals/Contributions & METRO………………………………………………. 0.0

14. Pay-as-You-Go Capital………………………………………………………..…+12.3

15. General Capital Fund……………………………………………………..……….+1.0

16. Other………………………………………………………..……………………..+0.1

TOTAL…………$764.8

Surplus of Revenues over Expenditures………………………………………………… +$73.7

17. NET Committee Balancing Recommendations………………………………………-$73.7

11.4 cents reduction rather than the Manager’s 5 cents as advertised

Committee OPTION for Separate Federation Vote:

18. Homeowner’s Grant Program…………………………………………………....+$2.2

Adoption of this OPTION would reduce the above recommended real estate rate reduction when the final Federation budget recommendation is transmitted to the County Board.

When comparing FY’05 adopted budgets and the Federation’s recommendations for FY’06, the results are as follows: Schools – 5.6% increase and County (General Fund after Schools transfers and debt service) – 5.9% increase.

EXPLANATIONS OF RECOMMENDED CHANGES

M =’s millions K =’s thousands of dollars

REVENUES:

(A) County Manager’s BASE BUDGET ($0.0M):

The Committee found that the presentation of this Fiscal Year’s Base Budget did not measure up well to the County’s usual standards. It made no provision for any Pay-as-You-Go Capital program; this is a dramatic departure from long standing policy regarding the proper mix of bonds and Pay-as-You-Go for major capital projects.

In addition, items such as operating costs, even basic janitorial services, for new County facilities and renovated facilities were not a part of the Base Budget. Rather, they were to be covered within a Budget Contingent for Strategic Options. The only apparent benefit of this was to keep $1.4 million in normal, expected expenditures out of the Base Budget and year-to-year growth calculations for that budget.

The Committee reviewed these eleven Strategic Option items. It supported nine of the items; and they appear in the proper Departmental categories below as increased expenditures. For one, the Committee recommended an increase in funding as shown below and consistent with a prior Federation approved motion. For the final item, a position fully supported by increased user fees, the Committee accepted a County staff decision to withdraw the proposal.

The Manager has proposed a new reserve fund this year called the "Revenue Stabilization Reserve" that is intended to set aside $9.7 million in excess funds for whatever purpose the County decides to use it eventually with minimal public notice and input. The apparent reason that a reserve of this nature could be proposed is that the Manager is not adjusting the tax rate to produce only the funds needed to run Arlington's government. There appears to be the assumption that the rising home assessments entitle the County Government to tax revenues that rise faster than inflation as well. The Committee emphatically rejects this proposal. However, the Committee does support the Manager’s proposal to increase the General Fund Operating Reserve by $1 million to maintain its ratio to overall budget; see (15) below.

The Commonwealth increased the recordation tax during FY’05 after the FY’05 County budget was approved. The County collects the same tax, indexed to the state rate. “As directed by the County Board, the total amount of the incremental recordation tax revenue from the higher rate for both FY 2005 and FY 2006 has been proposed for Affordable Housing initiatives.” This County Board “direction”, as interpreted by the Manager, has the effect of removing the Recordation Tax increase from the pool of local taxes subject to the revenue sharing agreement with the Schools. The Manager estimates $1,848K for FY’05 [included by the Committee in (B) below] and $2,612K for FY’06 already included in the Manager’s Base Budget revenues. The amounts recommended by the Committee for expenditures for these purposes are shown below in appropriate Departments.

(B) FY’05 Carryover (+$23.5M):

In his proposed budget, the County Manager presented a table showing that for Total General Fund Revenues for FY’05, the Adopted Budget amount would be exceeded by the Estimated amount by $23,735,167. However, he showed only $1.3 million of this amount in his overall tables. The Committee accepts the Manager’s initial additional estimate of $22.4 million (the bulk of which came from real estate collections higher than Approved Budget amounts). On March 24, the County’s belated Mid-Year Review recognized $21.9 million in additional revenues. With rounding, this equals the Committee’s additional $22.435 million minus the $573K additional expenditures noted below.

The Committee is not the only entity concerned about County budget estimates. The County’s Comprehensive Annual Financial Report for FY’04 (audit) noted under Legal Compliance (bolding added): “Expenditures exceeded the level of control in FY 2004 for the following departments: the County Board Office, the County Manager’s Office, the Human Resources Department, the County Attorney’s Office, the Treasurer’s Office, the Electoral Board Office and the Sheriff’s Office. The County Board will re-appropriate funds to increase these budgets in the annual closeout package in November of FY 2004. Management will ensure these departments develop better budget estimates in future years.”

In view of the history of significant divergences between budgeted revenues and expenditures, the practice of withholding distribution of the most recent Comprehensive Annual Financial Report until mid-November raises serious questions about governance.

Based upon the actual changes in recent fiscal years calculable 9 months into the fiscal year – both net reduced expenditures and net increased revenues – the Committee very conservatively estimates that no less than an additional $1.75 million will be available after the fiscal year is closed out. [$992K in local taxes and $753K in other.] The Committee currently projects that the actual will exceed $4 Million, but conservatively will allow for unexpected events in the next three months. For instance, savings from less than anticipated snow removal will be netted out by higher fuel costs while employee turnover lapse savings will exceed projections and higher than currently projected State and Federal contributions will be recognized. The Committee projection reduces, but does not eliminate, customary variability in revenues.

On March 15, the County Board approved, as a part of its Consent Agenda, $673K in “emergency” funding for Culpepper Gardens: $573K in FY’05 funds which will reduce possible carryover and committed $100K in FY’06 funds shown in (15) below. These actions were a part of the Manager’s proposed Policy Priority for Affordable Housing.

(C) FY’05 Capital Reserve (+$2.8M):

In November 2004, the County Board appropriated $3.3 million as a reserve for capital improvements (after amending the FY’04 Schools appropriation as per the Revenue Sharing Agreement) without a specified period for its use. Of this amount, according to a staff report to the Fiscal Affairs Advisory Commission in March 2005, $2.8 million is yet to be allocated. The Committee uses this amount to partially fund FY’06 capital improvements.

(D) FY’06 Revenue Re-estimations (+$25.2M):

Real Estate:

The Manager proposes only a growth in real estate assessments of 6% as of January 1, 2006 compared to the 18.1% experienced as of January 1, 2005. Such growth is measured basically by the changes in assessments through the prior June 30. We are already 3/4ths through the data collection period for the next calculation – growth rates in residential assessments have not abated and new construction has increased. Again, a growth rate of 18.1% is likely. However, to be very guarded in estimating future revenues, the Committee will calculate only 90% of that annual growth – accepting the possibility of a 40% slackening in growth for the remainder of the calculation period. This leads us to estimate an additional $21.9 million above the Manager’s proposal. As the Manager himself stated in his September 2004 budget guidance: “This year Arlington's housing market has continued to be very hot. Average residential real estate assessment growth is approaching 20% for the fourth year in a row.”

While reviewing projected recent fiscal year revenues, the Committee concluded that a systematic problem existed in Arlington budgeting. The use of a calendar year basis for real estate assessments versus a fiscal year basis for revenues creates unnecessary confusion and uncertainty. The Committee will prepare and send to the Federation’s Legislation Committee a request for Arlington to seek Commonwealth authority to adopt a real estate assessment period consistent with the County’s fiscal year – e.g. when the County adopts a tax rate it would begin only in the period of the budget adopted at that same time.

Other:

In anticipation of the Manager’s Third Quarter Review, the Committee has included a minimal estimate of $1.1 million in additional increases above the Manager’s projections for other local revenue sources in the proposed budget for the coming fiscal year as well as a minimal estimate of $2.2 million for additional net State and Federal funds (making the FY’06 projected revenues equal the FY’04 actual.) Of the local tax increase, $500K is increased BPOL collections attributable to initial BPOL program enhancements in the Office of the Commissioner of Revenue that are expected to further increase in the future.

(E) Manager’s Change to Real Estate Tax Relief (-$0.2M):

During the 2004 session, the General Assembly increased the income and asset maximums, which pertain to Arlington County, for this program. The County has historically adopted all State changes. These changes would reduce revenues by a currently estimated $200.5K at current tax rates (was only $100K in Manager’s budget message).

The Committee joins County staff in recommending increasing the income and asset limits to provide additional relief to low- and moderate-income elderly or disabled homeowners who are disproportionately impacted by rapidly rising real estate assessments.

(F) Miscellaneous FY’06 Fee Increases (+$3.3M):

As per the above discussion, the Committee accepts the Manager’s estimate of additional fee revenues ($85.8K) associated with additional traffic fines resulting from the addition of one uniformed Police Officer.

The Manager’s options to raise parking meter fees by $0.7 million and parking fines by $0.4 million were eliminated when the County Board voted not to advertise these increases on March 15.

The Committee accepts the Manager’s option to raise ambulance fees, which have not been increased in a number of years, and raise $0.4 million in additional revenue. The majority of these fees are reimbursable by insurance carriers and the raise is consistent with prior Federation efforts to achieve full cost recovery for appropriate County services and with the charges of other regional jurisdictions.

The Committee supports the Manager’s option of raising the Commercial Utility Tax (CUT) by 30% for increased revenues of $2.0 million This rate increase partially reduces the growing discrepancy between residential and commercial real estate revenues and burden.

Consistent with prior Federation recommendations, making the ASAP program fully cost reimbursable would result in $102.6K in additional fees; see (4) below.

The full costs of the emergency siren and voice alert system recommended in (5) below are assumed to be available from available Federal homeland Security grant programs; thus, additional revenues of $200K.

The costs of equipment (e.g. vehicles and bullet-proof vests) associated with the recommendation in (5) below for additional police officers can and should be funded by ‘seized asset funds’ available to the County, but not now a part of the budget. This would provide approximately $94K in additional revenues.

For the Department of Human Serv